1 00:00:00,637 --> 00:00:06,097 One of my favorite factors in all of the psychology of money has to do with 2 00:00:06,097 --> 00:00:10,530 something called the pain of paying, and here is the idea. 3 00:00:10,530 --> 00:00:16,650 Imagine that you go to dinner, it's an expensive dinner, it's a good dinner. 4 00:00:16,650 --> 00:00:22,446 At the end of the dinner you are paying, and you can pay either with the cash or 5 00:00:22,446 --> 00:00:28,767 with credit card. Ask yourself which one would feel worse. 6 00:00:28,768 --> 00:00:32,050 Which one would you feel a bit more ting, a bit more unpleasantness? 7 00:00:32,050 --> 00:00:34,823 It would kind of diminish they joy of the meal. 8 00:00:34,823 --> 00:00:39,722 Eh, basically everybody when they ask this question say the cash would feel worse 9 00:00:39,722 --> 00:00:41,580 than the credit card. Now why? 10 00:00:41,580 --> 00:00:46,050 Why does the cash feel, feel so different? You know how much the meal would cost. 11 00:00:46,050 --> 00:00:49,357 This is not surprise. You see the prices on the menu. 12 00:00:49,358 --> 00:00:52,404 But something aout the cash feels differently. 13 00:00:52,404 --> 00:00:56,798 Where is it coming from? And there is this notion of the pain of 14 00:00:56,798 --> 00:01:00,438 paying. We'd say that the agony of parting with 15 00:01:00,438 --> 00:01:05,730 our money has to do with the saliency of do we see this money going away, and it 16 00:01:05,730 --> 00:01:11,190 has to do with the timing of whether the money is going away at the same time that 17 00:01:11,190 --> 00:01:14,250 we're consuming. So imagine the following example. 18 00:01:14,250 --> 00:01:18,873 Imagine that I own the restaurant, and I learned over time that people basically 19 00:01:18,873 --> 00:01:22,612 eat 50 bites and pay $50. That's what everybody does, or more or 20 00:01:22,612 --> 00:01:25,232 less everybody does. And they came to you and they said it 21 00:01:25,232 --> 00:01:28,440 because I like you so much, I'm going to give you a great discount. 22 00:01:28,440 --> 00:01:32,508 It's going to be 50 cents per bite. I'll only charge you 50 cents per bite, 23 00:01:32,508 --> 00:01:35,747 and not only that, I'll only charge you for the bites you eat. 24 00:01:35,748 --> 00:01:40,245 So I'll serve you your dish I will stand back, I will open my little eh, notebook 25 00:01:40,245 --> 00:01:44,523 and every time you will take a bite, I will write a v in this is to indicate how 26 00:01:44,523 --> 00:01:48,939 man bites you took and at the end of the meal, I will charge you 50 cents only for 27 00:01:48,939 --> 00:01:52,550 the bites that you took. Now ask yourself, is this going to be a 28 00:01:52,550 --> 00:01:55,656 financially efficient meal? Of course. 29 00:01:55,656 --> 00:01:59,476 You start at 50 cents per bite and only for the bites You eat. 30 00:01:59,476 --> 00:02:03,687 But how much fun will that meal be? Probably will be quite terrible. 31 00:02:03,688 --> 00:02:07,940 In fact, in my Ph.D. Seminar not to long ago I tried that. 32 00:02:07,940 --> 00:02:10,605 I usually bring lunch for the students in the Ph.D. 33 00:02:10,605 --> 00:02:16,068 Seminar, and on that particular day I told them that I'm going to charge them 25 34 00:02:16,068 --> 00:02:18,800 cents per bite. I gave, I brought pizza the same day. 35 00:02:18,800 --> 00:02:21,514 And you know what? Their bites where so huge. 36 00:02:21,515 --> 00:02:24,785 It was awful. I could basically stuff their face to get, 37 00:02:24,785 --> 00:02:27,613 the maximum amount of bite. And, you know, they were really good, 38 00:02:27,613 --> 00:02:30,530 these are PHD students. They are really, very well versed in 39 00:02:30,530 --> 00:02:35,110 getting free food and eating very quickly. But at the end of the day, they did not 40 00:02:35,110 --> 00:02:38,146 enjoy. Sure, they paid a little less, but the 41 00:02:38,146 --> 00:02:43,853 misery was very, was very high. Here's another way to think about it. 42 00:02:43,853 --> 00:02:46,770 Imagine you're going for a cruise. It's a cruise to Alaska. 43 00:02:46,770 --> 00:02:49,830 It's a beautiful cruise and you have two ways of paying. 44 00:02:49,830 --> 00:02:54,862 You can either pay three months in advance before you go on the cruise or you can pay 45 00:02:54,862 --> 00:02:59,850 the moment you get off the boat. Which one of those is the economically 46 00:02:59,850 --> 00:03:03,300 efficient way to pay? Of course the moment you get off the boat. 47 00:03:03,300 --> 00:03:06,647 You keep the money for longer, you can invest it and so on. 48 00:03:06,648 --> 00:03:10,536 But ask yourself how would you feel during the cruise if you know that the end of the 49 00:03:10,536 --> 00:03:15,242 cruise you have to pay all this amount? Ask yourself, how would you feel in the 50 00:03:15,242 --> 00:03:19,400 last day of the cruise knowing that tomorrow you're going to be parting with 51 00:03:19,400 --> 00:03:22,054 all this money? You would probably spend the whole day in 52 00:03:22,054 --> 00:03:25,267 the buffet trying to advertise your investment, trying to get as much as you 53 00:03:25,267 --> 00:03:27,680 can back. And then, of course, you have to pay a 54 00:03:27,680 --> 00:03:31,648 trainer or go to the gym, or do something else to try and get rid of this extra 55 00:03:31,648 --> 00:03:35,675 weight. So what's interesting here is that we have 56 00:03:35,675 --> 00:03:40,834 this notion of the pain of paying and what the pain of paying does is it adds a moral 57 00:03:40,834 --> 00:03:46,107 tax on to our consumption and because of that it changes how we feel about payment. 58 00:03:46,107 --> 00:03:48,670 And what's also interesting about this small tax. 59 00:03:48,670 --> 00:03:52,134 It's about saliency. It's about how we feel about these 60 00:03:52,134 --> 00:03:55,090 payments, how mu, how a much attention we give to it. 61 00:03:55,090 --> 00:03:59,150 How much do we notice it? And because of that it can change how we 62 00:03:59,150 --> 00:04:03,087 enjoy the experience. So think about the following question. 63 00:04:03,088 --> 00:04:06,754 Are there cases in which you would like to increase the pain of paying? 64 00:04:06,755 --> 00:04:11,367 And all the cases in which you like to decrease the pain of paying. 65 00:04:11,368 --> 00:04:17,657 So think about this for, for a minute or so. 66 00:04:17,658 --> 00:04:21,574 Here are a couple of ways to think about the pain of paying and is it good or is it 67 00:04:21,574 --> 00:04:24,027 bad. So for example, I think that if we go 68 00:04:24,027 --> 00:04:28,510 around our consumption day by day, we might want to feel more pain of pain. 69 00:04:28,510 --> 00:04:31,198 We might say to ourself. You know what them spending too much money 70 00:04:31,198 --> 00:04:33,730 and all kind of things. Let me feel more pain of pain. 71 00:04:33,730 --> 00:04:38,930 Let me switch from credit cards, which disassociate the consumption from the 72 00:04:38,930 --> 00:04:42,950 timing of the payment to cash. Or if I can't go all the way to cash, we 73 00:04:42,950 --> 00:04:47,034 will go to debit card, which give you some sens of paying at the moment. 74 00:04:47,035 --> 00:04:49,848 Maybe I'll sign up for automatic notification. 75 00:04:49,848 --> 00:04:53,756 That, every time I use my debit card, it would let me know that I just spend some 76 00:04:53,756 --> 00:04:56,660 money, and that would increase, the pain of paying. 77 00:04:56,660 --> 00:05:02,244 And control my spending, to some degree. You can also think about the difference 78 00:05:02,244 --> 00:05:06,108 between paying for gasoline, and paying for electricity. 79 00:05:06,109 --> 00:05:10,408 When we pay for gasoline, we stand in the gas station, we put the thing in, we press 80 00:05:10,408 --> 00:05:14,975 the button and we see this running around. There's an incredibly high pain of paying 81 00:05:14,975 --> 00:05:18,030 feeling to it because we see the amount of money running. 82 00:05:18,030 --> 00:05:20,970 You could imagine, by the way, an even worse version. 83 00:05:20,970 --> 00:05:23,938 You could imagine that filling the gas station would take, would be 84 00:05:23,938 --> 00:05:26,339 instantaneously and we'd know amount of money. 85 00:05:26,340 --> 00:05:29,990 But then the gas company will have a little meter running in your car. 86 00:05:29,990 --> 00:05:34,406 And as you're driving you see how many cents are being taken away from you bank 87 00:05:34,406 --> 00:05:37,193 account. And every time you press fast on the 88 00:05:37,193 --> 00:05:42,316 accelerator it will go a little faster it will maximize, the pain of paying. 89 00:05:42,316 --> 00:05:47,609 But with gas, even the way it is now,with petrol , we have this increased high pain 90 00:05:47,609 --> 00:05:49,690 of paying. We see the amount of money. 91 00:05:49,690 --> 00:05:53,247 We buy a lot of it every time. We see it running around. 92 00:05:53,248 --> 00:05:56,885 Think about the electricity. Electricity, we have no meter in the home, 93 00:05:56,885 --> 00:05:59,330 it's usually outside. We don't see it progressing. 94 00:05:59,330 --> 00:06:04,732 It's automatically taken from our checking account a month and something later, after 95 00:06:04,732 --> 00:06:07,709 we've finished consuming it. No pain of paying. 96 00:06:07,710 --> 00:06:10,980 Now maybe we should have brought some pain of paying into it. 97 00:06:10,980 --> 00:06:13,828 For example, what if we put the meter in the middle of the living room? 98 00:06:13,828 --> 00:06:15,790 Right? Now you would take it. 99 00:06:15,790 --> 00:06:19,802 Or even better, you know, there used to be this English system, where for heating a 100 00:06:19,802 --> 00:06:23,578 home you would put coins into the system and it would heat your house just for a 101 00:06:23,578 --> 00:06:26,125 while. Imagine your air conditioning and heater 102 00:06:26,125 --> 00:06:29,116 was working like this. Every time you wanted heat or AC you would 103 00:06:29,116 --> 00:06:32,260 put the money in. And it would, eh, run until you choose and 104 00:06:32,260 --> 00:06:36,952 then you had to put more money in, and now the pain of paying would increase further 105 00:06:36,952 --> 00:06:40,625 and your house would probably not be as comfortable as you want. 106 00:06:40,625 --> 00:06:45,377 Now, there's some cases we might want to decease the pain of paying. 107 00:06:45,378 --> 00:06:48,946 Imagine you go on vacation. And you go on vacation, it's expensive 108 00:06:48,946 --> 00:06:51,970 place, and you know, you spend lots of money on it, but in the evening you want 109 00:06:51,970 --> 00:06:57,555 this. Particular drink martini and it's 110 00:06:57,555 --> 00:07:00,998 expensive. Now if you feel the pain of paying and you 111 00:07:00,998 --> 00:07:05,222 have to pay extra for the martini you might decide not to have that martini but 112 00:07:05,222 --> 00:07:08,891 is this the right thing. Well, if you paid for a prepaid vacation 113 00:07:08,891 --> 00:07:12,958 that includes everything. You might spend, in absolute terms, more 114 00:07:12,958 --> 00:07:15,627 money. But you would not have to think about all 115 00:07:15,627 --> 00:07:19,006 of these small components. And by not having to think about all of 116 00:07:19,006 --> 00:07:22,840 these small components, you might actually enjoy your vacation to a high degree. 117 00:07:22,840 --> 00:07:27,715 So you can imagine how prepaying for something, or paying for an all inclusive 118 00:07:27,715 --> 00:07:32,440 vacation, or paying to reduce the pain of paying could actually get you to do 119 00:07:32,440 --> 00:07:36,001 something that you want to do, but have a hard time doing. 120 00:07:36,001 --> 00:07:42,020 And here's one last example of, the agony of pain of paying, and how to reduce it. 121 00:07:42,020 --> 00:07:46,047 And this has to do with what is an ideal gift. 122 00:07:46,048 --> 00:07:47,994 Think about it. What is an ideal gift? 123 00:07:47,995 --> 00:07:51,412 And I don't mean that you could say, you know, shoes or a backpack or something 124 00:07:51,412 --> 00:07:55,396 like that. What are the characteristics of an ideal 125 00:07:55,396 --> 00:07:58,501 gift? And one thing about an ideal gift is that 126 00:07:58,501 --> 00:08:01,647 it removes the pain of paying from other people. 127 00:08:01,648 --> 00:08:05,500 So I'm sure all of you have things that you want but don't feel right about 128 00:08:05,500 --> 00:08:08,270 geting. And those are exactly the things that are 129 00:08:08,270 --> 00:08:11,061 great gifts. Because you want it and this pain of 130 00:08:11,061 --> 00:08:15,770 paying is preventing you from doing it. So imagine, for example, that you walk 131 00:08:15,770 --> 00:08:19,227 down the street, and, you, at the window of a store you see a hat. 132 00:08:19,228 --> 00:08:23,508 And you put on the hat and it's beautiful. It's wonderful, it's the right color and 133 00:08:23,508 --> 00:08:25,920 size. Beautiful shape, really interesting. 134 00:08:25,920 --> 00:08:29,760 But then you take it off and you look at the price and you say to yourself, I just 135 00:08:29,760 --> 00:08:32,350 can't imagine paying this amount of money for a hat. 136 00:08:32,350 --> 00:08:35,517 Who really buys hat? You put it back. 137 00:08:35,518 --> 00:08:39,950 You go home, and you find out that your significant other bought the same exact 138 00:08:39,950 --> 00:08:43,049 hat for you, from your joint checking account. 139 00:08:43,050 --> 00:08:46,126 What do you do? Do you say, honey thank you very much, I 140 00:08:46,126 --> 00:08:50,284 thought about it, I considered it, but I decided it was not worth it, please take 141 00:08:50,284 --> 00:08:53,312 the hat and return it. Of course not, you would be incredibly 142 00:08:53,312 --> 00:08:54,054 grateful. Why? 143 00:08:54,054 --> 00:08:58,974 Because your significant other has just taken this pain of paying out of the 144 00:08:58,974 --> 00:09:04,150 transaction, giving you only the benefits. And that's by the way, one of the 145 00:09:04,150 --> 00:09:09,516 characteristics of a good, of a good gift. So going back in general to the pain of 146 00:09:09,516 --> 00:09:14,380 paying it means that payment have the opportunity cost, right, you giving up 147 00:09:14,380 --> 00:09:19,472 something when you buying something which we don't always notice but is a part of 148 00:09:19,472 --> 00:09:22,824 the[UNKNOWN]. It has hassle component, taking cash, 149 00:09:22,824 --> 00:09:27,704 taking credit cards and so on. But it also has a component of the pain of 150 00:09:27,704 --> 00:09:32,618 paying, of a moral tax, of some guilt, it is associated with the payment, and 151 00:09:32,618 --> 00:09:38,078 different methods of payment could create different amount of guilt and different 152 00:09:38,078 --> 00:09:41,438 timing of payment would create different guilt. 153 00:09:41,438 --> 00:09:44,980 And so it we prepaid for vacation, not so much guilt. 154 00:09:44,980 --> 00:09:49,270 If we pay for vacation or for meal for every bite, maximum guilt. 155 00:09:49,270 --> 00:09:54,667 If we pay after the fact, like in credit cards, not so much guilt. 156 00:09:54,668 --> 00:09:59,987 In addition to the timing, the method of payment also matters. 157 00:09:59,988 --> 00:10:04,672 If you go to a casino, and you take $1,000 and you transition them to chips, now 158 00:10:04,672 --> 00:10:09,894 you've basically in your mind taken all this amount of money and allocated them. 159 00:10:09,895 --> 00:10:15,662 To be spend in the, in the casino. Not so much pain of paying is involved now 160 00:10:15,662 --> 00:10:19,176 when you spend it. Or if I gave you $1,000, good for an 161 00:10:19,176 --> 00:10:24,588 online store for ten years, the money would be associated with that particular 162 00:10:24,588 --> 00:10:27,234 purchase. There would be no pain of paying and you 163 00:10:27,234 --> 00:10:32,227 would find it incredibly easy. To, to spend on that, on that category. 164 00:10:32,228 --> 00:10:36,144 There was a very interesting case about the pain of paying that happened many 165 00:10:36,144 --> 00:10:40,392 years ago with America Online. America Online, for a long time, used to 166 00:10:40,392 --> 00:10:43,795 charge people by the hour. In fact, they had two packages. 167 00:10:43,795 --> 00:10:51,768 You could pay $19.95 for 20 hours. And then plus $2.95 for every additional 168 00:10:51,768 --> 00:10:55,099 hour. Or you can get a smaller package of $9.95 169 00:10:55,099 --> 00:10:58,760 for five hours, plus $2.95 for each additional hour. 170 00:10:58,760 --> 00:11:03,150 But most people took the 20 hours for $19.95, and they paid additional. 171 00:11:03,150 --> 00:11:07,272 And then, at some point, in 1996, at the end of 1996. 172 00:11:07,272 --> 00:11:10,821 Aol decided. To move to a membership in which there 173 00:11:10,821 --> 00:11:13,420 would be no charge for the additional hour. 174 00:11:13,420 --> 00:11:19,180 So instead of $19.95 for 20 hours plus $2.95 per hour, they moved to $19.95 for 175 00:11:19,180 --> 00:11:22,464 all the amount of time that you can consume. 176 00:11:22,464 --> 00:11:26,689 Now, let's assume that you're going to make this transition, from this tier 177 00:11:26,689 --> 00:11:30,910 system, up to 20 hours and then each additional hour costs you, to the system 178 00:11:30,910 --> 00:11:33,890 in which You can buy, you could use as much as you want. 179 00:11:33,890 --> 00:11:37,471 What do you have to try an estimate? You have to try to estimate how many 180 00:11:37,471 --> 00:11:41,954 people are going to start using more. That was a period that modems were around 181 00:11:41,954 --> 00:11:45,580 and America Online had to decide how many more modems to have. 182 00:11:45,580 --> 00:11:49,771 So they basically looked at the distribution of how many people used it 183 00:11:49,771 --> 00:11:53,763 and they said that people who were using more than 20 hours. 184 00:11:53,764 --> 00:11:57,027 They were constrained by the marginal cost. 185 00:11:57,028 --> 00:12:01,265 So the people who used more than 20 hours would probably want to use more, maybe 186 00:12:01,265 --> 00:12:06,190 another ten hours, maybe another 20 hours. These are people that were constrained by 187 00:12:06,190 --> 00:12:09,762 the marginal, cost. But the people who used 19 hours were not 188 00:12:09,762 --> 00:12:12,350 really constrained. They could have used another hour. 189 00:12:12,350 --> 00:12:15,241 But they said, you know, maybe people who used 19 hours were a little bit 190 00:12:15,241 --> 00:12:18,239 constrained because they kind of missed their calculations. 191 00:12:18,240 --> 00:12:22,560 But the people who used ten hours. Those people clearly didn't have any more 192 00:12:22,560 --> 00:12:25,080 demand. They could have used another ten hours. 193 00:12:25,080 --> 00:12:29,788 And don't feel and don't pay for it. So they look at this distribution, they 194 00:12:29,788 --> 00:12:33,428 looked at the number of people who spend more than 20 hours and assume that they 195 00:12:33,428 --> 00:12:36,928 will use much more. The took a the people who spent 19, and 196 00:12:36,928 --> 00:12:41,212 maybe 18 hours and so on and said maybe they will use a little bit more because 197 00:12:41,212 --> 00:12:44,877 they got confused with the calculation in trying to keep track. 198 00:12:44,878 --> 00:12:50,057 And based on that they increased their capacity by a tiny amount. 199 00:12:50,058 --> 00:12:54,613 But what actually happened that night? The demand[SOUND]. 200 00:12:55,637 --> 00:12:58,703 Quadrupled, right? Why? 201 00:12:58,704 --> 00:13:04,300 Because it wasn't just about the 20 hour. It was about the fact that you, if you 202 00:13:04,300 --> 00:13:08,500 were AOL user, and I was in those days, if you're an AOL user in those days. 203 00:13:08,500 --> 00:13:10,929 I guess I'm dating myself sorry for that, but if I. 204 00:13:10,930 --> 00:13:13,410 If you were like me, an AOL user in those time. 205 00:13:13,410 --> 00:13:17,134 You had the little clock. A little bit like the gas meter, like the 206 00:13:17,134 --> 00:13:20,563 gasoline meter. That runs around and says, finished 1 207 00:13:20,563 --> 00:13:24,237 hour, finished 2 hours. And even though I might never get to my 20 208 00:13:24,237 --> 00:13:27,037 hours. This was an annoying feeling. 209 00:13:27,038 --> 00:13:30,058 Just knowing what it is. And it's counting, and going up and up and 210 00:13:30,058 --> 00:13:32,579 up, was an annoying feeling. And because of that. 211 00:13:32,580 --> 00:13:37,192 Even the people who were using very little all of a sudden changed dramatically their 212 00:13:37,192 --> 00:13:41,682 behavior and started using much more. Now to AOL's sad, reality, they were 213 00:13:41,682 --> 00:13:46,436 completely unprepared for that. So that night they had to deal with all 214 00:13:46,436 --> 00:13:50,632 kinds of access demand. And they had to hire lines and get all the 215 00:13:50,632 --> 00:13:56,108 small operators to, to help them out and, these small operators were only happy to 216 00:13:56,108 --> 00:14:01,066 you know, stick it them and overcharge them for this, for this particular 217 00:14:01,066 --> 00:14:05,125 privilege. But this was a case in which AOL should 218 00:14:05,125 --> 00:14:10,329 have been prepared, right? Aol made the rational calculation as if 219 00:14:10,329 --> 00:14:14,447 people, what was stopping them was only the marginal cost. 220 00:14:14,448 --> 00:14:18,156 But if you think about people as what's stopping them is both the rational cost, 221 00:14:18,156 --> 00:14:20,930 the increased marginal cost, but also the pain of paying. 222 00:14:20,930 --> 00:14:24,430 You would make very different predictions about what's right and wrong. 223 00:14:24,430 --> 00:14:30,157 And very different predictions about how your market would look like before such a 224 00:14:30,157 --> 00:14:32,343 change and after such a change.